Rev. Rul. 73-21

Advice has been requested whether the value of the corpus of an inter vivos trust created by a decedent is includible in his gross estate under section 2036 of the Internal Revenue Code of 1954, under the circumstances described below.

The decedent transferred property in trust for the benefit of A, B, and C for their lives. Upon the death of the survivor of the life tenants, the remainder is payable to D. The trust instrument authorized the trustee to distribute income to such of the life tenants and in such amounts as he deemed appropriate. Any undistributed income is to be accumulated and added to corpus annually. The decedent reserved the power to appoint a successor (which, under state law applicable to the administration of the trust, included the power to appoint himself) upon the death, resignation, or inability to serve of the original trustee. At the time of decedent's death, the original trustee was still serving in that capacity.

Section 2036(a)(2) of the Code provides that the value of the gross estate shall include the value of any interest in property transferred by the decedent where he has retained for his life, or for any period not ascertainable without reference to his death, or for any period which does not in fact end before his death, the right, either alone or in conjunction with any other person, to designate the person or persons who shall possess or enjoy the property or the income therefrom.

Section 20.2036-1(b)(3) of the Estate Tax Regulations provides that "The phrase 'right * * * to designate the person or persons who shall possess or enjoy the transferred property or the income therefrom' includes a reserved power to designate the person or persons to receive the income from the transferred property * * * during the decedent's life or [for any period not ascertainable without reference to his death]." It also provides that "With respect to such a power, it is immaterial * * * whether the exercise of the power was subject to a contingency beyond the decedent's control which did not occur before his death (e.g., the death of another person during the decedent's lifetime." The power granted the trustee in this case to determine whether to distribute or accumulate income, and in what amounts, is a power to designate who shall possess or enjoy the income within the meaning of the Code and the regulations. Inasmuch as the decedent had the contingent right to appoint himself successor trustee upon the failure of the original trustee to serve in that capacity, he is considered to have retained a contingent right to designate beneficial enjoyment of the trust income. It does not matter that the power to determine the beneficial interests was exercisable by the decedent only if he appointed himself successor trustee. Nor is it material that the decedent could appoint himself only in the event of the death, resignation, or incapacity of the original trustee, a contingency beyond the decedent's control which did not in fact occur prior to the decedent's death.

In view of the foregoing, it is held that the decedent retained for a period not ascertainable without reference to his death the right to designate the person or persons to receive the income from the transferred property. Accordingly, the value of the property is includible in his gross estate under section 2036(a)(2) of the Code.